Canada's banks, which have enjoyed a reputation for stability for decades, have been weathering an unusual crisis of public confidence brought on by the collapse of two small financial institutions.
In the latest development in what is perhaps the worst period in 60 years for the industry here, Montreal-based Mercantile Bank of Canada, the country's eighth-largest bank, was forced into a merger last week with the sixth-largest, the National Bank of Canada.
The Mercantile, which has assets of $3.2 billion and is 24 percent owned by Citicorp of New York, was widely believed to have been the victim of a panic created by the failure in September of two banks in the oil-rich western province of Alberta -- the Canadian Commercial Bank, with headquarters in Edmonton, and Calgary-based Northland Bank.
The failure of Canadian Commmercial and Northland, which between them held only about 1 percent of the assets in the nation's banks, appears minor compared with the experience in the United States, where 95 banks have failed so far in 1985.
But the problems were greatly magnified here because there are only a few banks -- 14 when the crisis struck, and 11 now. Although banks have been in trouble occasionally, none has actually failed here since the Home Bank of Canada went under in 1923.
The fallout has caused embarrassment for the Conservative Party government of Prime Minister Brian Mulroney and produced calls for the resignation of senior government officials, including Gerald Bouey, governor of Canada's Central Bank.
In addition, there has been renewed dependence on the so-called Big Five institutions that are synonymous with Canadian banking in international circles.
These large corporations -- the Royal Bank of Canada, the Canadian Imperial Bank of Commerce, the Bank of Montreal, the Bank of Nova Scotia and the Toronto-Dominion Bank -- historically have dominated the industry here and between them control 90 percent of Canada's total assets of $292 billion.
"Within Canada, it's fairly clear that the recent problems have caused an awful lot of the banks' customers to put a priority on size, and there has been a flight to quality," said Michael Walsh, banking analyst at First Marathon Securities Ltd., a Toronto brokerage firm.
"This will have a pretty significant impact on the competitiveness of smaller institutions."
Most observers thus see the crisis as a setback for the efforts under way since the 1960s to bring diversity and more regional representation to an industry long accused of being too concentrated in the hands of a few eastern Canadian institutions.
Both Canadian Commercial and Northland sought to take advantage of the desire for independent financing in Western Canada -- and particularly Alberta Province, which produces most of the country's oil -- during the energy boom of the late 1970s.
Concentrating on loans to small and middle-sized commercial accounts in real estate and the petroleum business, the two banks experienced stunning growth. For instance, in the five years after it opened in 1976, Canadian Commercial, the creation of flamboyant western financier Howard Eaton, amassed a loan portfolio of $1 billion. This included substantial loans in California and a 39 percent investment in Westlands Bank (now called Commercial Center Bank) in Los Angeles.
Lacking diversification in their loans, these Western Canadian regional banks, like many U.S. banks, were hit hard when the slowdown in the energy industry and the general economic recession in the early 1980s caused widespread loan defaults.
With Canadian Commercial facing a liquidity crisis last March, the Mulroney administration engineered a $200 million rescue package in conjunction with the nation's six largest banks. But the infusion of funds, including $1 billion in advances from the Canadian Central Bank, was insufficient, and Ottawa announced in early September the bank would close.
After the widely publicized attempt to help Canadian Commercial, Northland, which was also highly dependent on wholesale deposits, began to experience liquidity problems. After a month of searching for a merger partner, Ottawa moved to close that institution as well.
Investor uncertainty then threatened to bring down Mercantile Bank, which, with $3.2 billion in assets, is relatively small and was also known to have some problems with its loan portfolio.
In early October, the largest banks gave Mercantile an injection of more then $200 million to keep it afloat until the merger with National Bank could be arranged.
As a result of the two closings and the merger, Canada is left with 11 commercial banks. There are also 58 foreign entries set up since the 1980 revision of the Bank Act, but they are limited in how much business they can do within Canada.
The implications of the collapse of Canadian Commercial and Northland will be felt for years in the financial industry here.
The affair subjected the Mulroney administration, which is moving to pay out about $1 billion to Canadian Commercial and Northland depositors who would otherwise not be insured, to embarrassing criticism.
And there has been increasing questioning of the financial business in general. Besides the bank failures, 18 Canadian trust companies or credit unions also have had a brush with bankruptcy since 1980.
Bad management, not just the recession, has played a role in enough cases to warrant national concern.
"There have been some unscrupulous operators in the financial industry," said Central Bank Governor Bouey recently. "One cannot help but be concerned about the number of instances where the financial problems of the individual institutions which have failed were related to transactions with the other business interests of the owners."
While the health of Canadian banks has improved along with the economy in the past few years, their operating ability and earnings are still being undercut by loans to Third World nations, where the major Canadian institutions share considerable exposure along with big U.S. banks and other lenders.
At the end of last year, the six largest Canadian banks had $10 billion in loans outstanding to Brazil, Mexico and Argentina.
For the Mulroney government, which has been drafting legislation to follow in the U.S. footsteps and partially deregulate the Canadian banking industry, the crisis atmosphere has shifted the emphasis away from innovation to ways of ensuring the existing system works soundly.
This may be a blow to other financial institutions such as trust companies, insurance companies and investment dealers, many of which had been looking forward to increased competition in a more liberalized regulatory atmosphere.
Those reforms, if they proceed at all, now appear likely to be much more limited than had been expected before the recent banking problems.